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As We Look For Signs Of Improvement In The Economy, Will AIG's Bonuses Prove To Be A Speed Bump Or A Roadblock To Obama's Plans?

By Charlie Cook

Here are two good, but somewhat contradictory questions for consideration at the tables in the Longworth Cafeteria.

First, with the Dow Jones Industrial Average staging something of a comeback in the last week, is it too soon to say that the economy has begun to turn around?

Second, will politically tone-deaf executives at the American International Group make President Obama's efforts to rescue the economy from dropping to apocalyptic depths impossible?

Acknowledging that this is the worst economic downturn since the Great Depression, with millions out of work or facing the possibility of losing work and others hurting worse financially than at any time in most of our lives, how the economy is doing is critical in determining the outcome of the next midterm elections.

As long as consumers aren't buying, employers aren't hiring and bankers aren't lending, the recession continues.

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History argues that the party in the White House typically suffers congressional losses in first-term midterm elections on the average of 16 House seats and just short of a wash in the Senate. But in party identification, the relative favorable/unfavorable ratings for the two parties and the generic congressional ballot test, the Republican Party is in awful shape, arguably as bad as since Watergate.

This suggests the GOP is hardly in any shape to capture seats unless the economy puts Democrats in an even worse light.

But in answer to the first question, it is far too soon to say that the economy is turning around. There is still a steady diet of bad economic news, but the change is that it isn't as relentlessly negative as it has been. At least today, there is a mixture of good and bad news, perhaps a sign that a bottoming-out for this downturn might at least be in sight.

While the stock market is far from a perfect economic indicator, it is a measure of how people feel about the economy. If people feel better about things, they buy, and if they feel worse, they sell.

While it was hardly news to any homeowner or anyone with a retirement plan that Americans lost 18 percent of their net worth last year, it was yet another reminder of how horrible things have been.

The last few days, people seem to be clinging to the positive news about the markets, almost willing things to get better. Maybe Norman Vincent Peale's The Power of Positive Thinking will jump up the Amazon book sales list.

The Gallup Organization's tracking polls, three-night moving averages of about 1,000 interviews conducted each night -- with a 2-point error margin -- are showing an uptick in the public mood about the economy.

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When they asked adults Friday, Saturday and Sunday whether economic conditions in the country were getting better or worse, 26 percent said better, compared with just 15 percent March 7-9 and the most positive finding since these tracking polls started in January 2008. Sixty-seven percent said worse, down from 78 percent in that period and the lowest in this series.

When asked to rate economic conditions, 9 percent said either "excellent" or "good," up nominally from 6 percent before and, sadly, the best since late January; 58 percent said either "fair" or "poor," down from 63 percent March 7-9 and the lowest in a month. These numbers are hardly sufficient to cause dancing in the streets, but they are better than we've seen and show some potential sign of progress.

One way to look at our economic challenges today is that one part of the problem is psychological, and another part is structural.

On the psychological side, as long as consumers aren't buying, employers aren't hiring and bankers aren't lending, the recession continues.

But when that cycle changes, that will bring us closer to recovery. So to the extent that we see some evidence of progress in terms of the stock market and public attitudes about the economy, that can be very helpful in bringing about a turnaround.

The structural problem, the balance-sheet weaknesses of many financial institutions, is the more obstinate challenge. Many economists suggest that if we can keep major financial institutions afloat, the economy will pull back into a recovery mode next year. But they argue that the failure of key financial institutions could trigger something more like a depression than the current recession.

Basically there are the wheels-on-the-bus and the wheels-coming-off-the-bus scenarios. The former results in a bumpy ride and a probable recovery later this year, and the latter is a horrible economy continuing long after 2009 is history.

That's where the bonuses offered by AIG to executives become a problem. If it becomes necessary for the Obama administration to come up with funds to rescue more financial institutions, will these executive compensation snafus make it harder or even impossible to do what it takes to keep us out of a depression?

The danger is that this incident could trigger a wave of populism and public outrage so great as to make further bailouts, necessary ones, politically impossible.

What we have is the equivalent of a drowning swimmer spitting into the face of a rescuer. That's why it is so key for Obama to come down on AIG with hobnailed boots, forcing them to back off.